For many married couples, filing a joint tax return is a good idea, but there are exceptions.
Over 90% of married couples file a joint federal tax return, but it’s still a good idea to evaluate if filing jointly is the most advantageous option for your family. Filing jointly can be convenient and often there’s a financial advantage, but that doesn’t mean it is the best option for everyone.
Years ago, there were fewer incentives to file jointly because the so-called “marriage penalty” for doing so was effectively greater. A “marriage penalty” doesn’t exist in the tax code, but in the past, income tax brackets were structured in a way that caused spouses with similar incomes to pay more in taxes by filing jointly than single taxpayers did.
There Are Many Good Reasons to File Jointly
Nearly every reason to file jointly involves saving money. Here are a few things to keep in mind when deciding whether to file jointly:
- Currently, married taxpayers who file separately face the income tax brackets at much lower income thresholds than other unmarried taxpayers. This means that they get taxed at a lower rate, therefore keeping more of their hard-earned money.
- Married is married, same-sex couples and couples of the opposite sex are treated the same.
- Joint filers can claim significant tax credits that married people filing separately do not qualify for.
- There are certain tax credits you may not qualify for if you don’t file jointly.
- Joint filing gives you the potential to claim the full Child Tax Credit, rather than a reduced one.
Deductions Decrease When You File Separately as A Married Couple
When you choose to file separately as a married couple, there are a few penalties you should be aware of. Here are a few to keep in mind:
- Standard deductions fall significantly
- Phase-out ranges are affected
- Some itemized deductions aren’t available for married couples who don’t file jointly
- Files can only deduct 50% of their losses for capital gains compared to joint filers
- If one spouse elects to itemize deductions, so must the other. Therefore, the spouse with fewer deductions can’t use the standard deduction to lower their taxable income.
Joint Filing Even Helps with the Alternative Minimum Tax (AMT).
When you file separately as a married couple, your AMT exemption falls by 50%. So, you may be more susceptible to the AMT if you file separately. If the AMT affects you, you will find many federal tax deductions reduced or unavailable to you.
Social Security benefits are minimal all on their own, but if you file separately, the taxes could bring that amount down even more. This is because Social Security gives you a “base exemption”, an income threshold above which Social Security benefits may be taxable. The base exemption for married couples filing jointly is $32,000, meaning that if 50% of the Social Security benefits you receive in a tax year plus your other income that year exceeds $32,000, taxes may apply. The base exemption for married couples filing separately is $0.
Why Wouldn’t You File Jointly When Married?
In some circumstances, filing separately may be wiser. For example, maybe you don’t trust your spouse financially. If your spouse interprets tax laws very loosely and you are more rigid, filing jointly could prove hazardous in the case of an audit or other troubles. Both spouses must sign a joint return, meaning that both spouses are legally responsible for all taxes, penalties, and fines linked to that return.
Another example is if you or your spouse have large out-of-pocket medical expenses. If so, and if the spouse contending with such bills earns much less than the other, it could make sense to file separately. By doing so, the spouse with less income might have an opportunity to meet the threshold needed to itemize medical expenses.
It’s also possible you may be considering a separation or divorce. If that’s the case, then it may seem natural to begin filing separately while still married. Doing so now may decrease the chance of you wading through tax issues in the aftermath of a split.
The Bottom Line
While most couples choose to file their taxes jointly, there are plenty of exceptions and every couple is unique. If you’re unsure about whether to file jointly or separately, or if you have other tax questions, then you should seek the advice of a qualified tax professional or financial planner. Navalign Wealth Partners are here to offer you the best in personal service and are happy to have a conversation with you about the best way to file your taxes.